Tag: Physical Gold

With all of the market manipulation, paper markets and central bank printing, it’s anyone’s guess what happened to gold prices last night, but here are some of the more logical theories that explain yesterday’s 500 ton paper gold sell-off:

The paper gold market is collapsing, and smart money is dumping their paper before it’s too late.

Central banks are manipulating the market to make fiat money appear to be the only sound safe haven.

According to former Assistant of the US Treasury, Dr. Paul Craig Roberts, “the exchange value of the dollar is (being) threatened, and if that collapses the Fed loses control over interest rates. Then the bond market blows up, the stock market blows up, and the banks that are too big to fail, fail. So it’s an act of desperation because they’ve got to establish in people’s minds that the dollar is the only safe place, it is the only safe haven, not gold, not silver, and not other currencies.”

The Federal Reserve is “trying to destroy gold as a haven from the dollar in order to carry on the Fed’s policy of negative real interest rates.”

trying to destroy gold as a (safe) haven from the dollar in order to carry on the Fed’s policy of negative real interest rates.

COMEX is normally a “paper gold” market in which investors rarely convert their contracts to physical gold. But in February, requests for physical delivery of gold on the COMEX set a record, reaching 43.26 tons (1,391,000 ounces). By comparison, previous records were around 10 tons. Have recent requests by Germany, Switzerland and Venezuela to return gold home sparked concern for safety? As I’ve mentioned before, many experts estimate there is as much as 200 ounces of paper gold for every ounce of physical gold. So how many physical deliveries does it take before the paper market is broken?

This is the first time that there is such a request for physical gold delivery from the COMEX since the 70s.

On Christmas Eve 2012, billionaire investor Eric Sprott spoke with SeekingAlpha and discussed the current gold-buying sprees of the central banks of the world.

Sprott pointed out that central banks continue to buy gold in developed and emerging countries. He does not believe western banks hold the amount of physical gold they claim to possess, and he criticized the never-ending money printing (quantitative easing) by western central banks. He continued to hypothesize that central banks have leased out much of the gold in their possession, which inflates the amounts of physical gold actually available in the market.

“I think we are in for a shortage of physical gold,” said Sprott. “I mean the data I look at, one just wonders how long can these western central banks keep doing this. Sooner or later you run out of gold. They only have so much gold, and it was estimated they had as little as 18,000 tons back in 2000, I would think they might be running on fumes these days.”

Sprott pointed to the central bank buying patterns of the emerging countries, and used the example of the estimated 500-ton increase in gold bought by central banks in Latin America in 2012. He argued that the amount of gold available to change hands has not increased as dramatically its demand by central banks.

“I’m pretty sure the number will be at least 500 tons of [Latin American] central bank buying,” commented Sprott, “and interestingly that contrasts with – they used to sell 400 tons a year. [Together, this is] a 900-ton change in what central banks are doing per year in a 4,000-ton market. Who is not buying the gold that’s been buying it all along? Because the supply has never increased in the past 12 years.

“I’ve argued that there’s at least a 2,400 ton shortage a year of physical gold and that the Western central banks have to be supplying that gold,” continued Sprott, “because the physical things you can count, the paper stuff… who knows what is going on in the paper markets?”

Sprott also referenced the ongoing economic crisis, and the inability of global markets to adequately recover from the crisis of 2008.

“I don’t think the world will countenance printing money ad nauseum, which has been going on in the western central banks,” said Sprott. “…It’s going to end badly.”

Most gold that is traded on the market isn’t actually gold; it’s paper or digits on a computer. In the same way your bank does not actually hold your savings in cash in a vault, gold brokers do not actually own all the gold that they trade. In fact, for every ounce of physical gold, there are at least 200 “paper” ounces.

Besides the obvious moral implications of trading something that doesn’t exist, this causes other problems. For example, it allows the true price of gold to be manipulated more easily. Also, what happens if, for any number of reasons, too many people want to take possession their physical gold? Recently when MF Global went bankrupt, Gerald Celente, and countless others lost over $1.6 billion when 33,000 client accounts simply “vaporized”. So let that be a lesson for you: if it’s not in your hand, you don’t own it.